Karnataka AAR has ruled firms must pay GST on services rendered by the head office for common accounting etc

Nothing symbolises bizarre tax rulings better than the recent ruling on GST by the Karnataka bench of the Authority on Advance Rulings (AAR) in a case involving Columbia Asia Hospitals, an international group offering healthcare services in India through 11 hospitals across six states—six of its hospitals are in Karnataka. In its application to the AAR, Columbia wanted to know how the taxman planned to treat various expenses, including those of its employees at the corporate headquarters who ended up providing services across the entire chain of hospitals.

The AAR ruled that such services would be considered to be ‘supply’ of services—and so liable to pay GST—since, as per Section 7(2) of the GST Act, the supply of goods and services “when made in the course or furtherance of business” shall be treated as a supply even if no money is charged for it. During the hearing, Columbia argued that there was a specific relaxation in Entry 1 of Schedule III that said “services by an employee to the employer in course of or in relation to his employment shall be neither treated as a supply of goods nor a supply of services”. But even if you leave aside the legalese, it is surely odd that a firm pays no GST on the salaries paid to its employees when it sells in just one state—and indeed, it must not—but has to pay when the same employees are also providing a common service to its unit in another state.

Nor is this the first time that a bench of the AAR has come out with a bizarre ruling. The Delhi AAR, for instance, had ruled that goods sold in a duty-free shop had to pay GST even though, historically, the shops don’t pay taxes on sales as they are considered to be an export. Similarly, in the case of installing solar equipment, while the Maharashtra AAR had said an 18% GST would apply, the Karnataka AAR ruled that a 5% rate would apply. While, as some suggest, the absence of a judicial member on the AAR could be a reason for such rulings, the central government/GST Council needs to challenge these rulings since they can soon become the norm even though each ruling is supposed to apply to just the one case it is delivered for.

In the Castleton income tax case, the AAR had ruled, in 2012, that even though it did not have a ‘permanent establishment’ in India, it could be taxed. Various other AARs had ruled the other way in other FII cases such as Timken (2009) and Praxair Pacific (2012). Yet, in 2015, the tax department decided to act upon the Castleton AAR and started issuing tax notices to various FIIs on the basis of this—such notices could theoretically add up to `40,000 crore. Over 10 trading sessions after the story became public, FIIs withdrew $2.2bn, causing both the Sensex and the rupee to collapse.

At that point, though the finance minister had initially supported the tax notices, he referred the matter to Justice AP Shah who recommended dropping the tax. Given the damage such rulings can cause, along with so many high-pitched tax demands, the government needs to be looking at them in a pro-active manner and either come out with clarifications—in the case of tax demands—or take them to a higher court in the case of such rulings as those by the AAR.